LI HEUNG SANG DAVID v. COMPUWARE ASIA PACIFIC LTD

HCA9271/2000
& HCA378/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTIONS NO.9271 OF 2000 AND 378 OF 2001

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(Consolidated pursuant to the Order of Registrar C. Chan
dated 7 March 2001)

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J U D G M E N T

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1. These two cases arise out of the employment of the plaintiff by the defendant, which is the Hong Kong subsidiary of an American software corporation, the Compuware Corporation. The plaintiff was employed by the defendant on 22 May 1998. He was promoted to be Sales Director, North Asia. The terms of the plaintiff's employment included a salary and other benefits including bonuses which were calculated under a "Fiscal Year 2000 Sales Compensation Plan". The bonuses were based on the achievement of sales figures for the plaintiff's North Asia area. The defendant reserved the right to reverse bonuses in respect of sales which remained unpaid.

2. Following the discovery by the plaintiff's officers that some sales figures from the Beijing office, of which the defendant was in charge, were apparently fictitious, the plaintiff decided to terminate the defendant's employment. This it did on 7 August 2000. The plaintiff was given a cheque which represented, inter alia, one month's salary in lieu of notice. There was mention in the letter of a claim against him in respect of overpaid bonuses. He cashed the cheque. However, the fact that shortly after his original appointment the defendant had agreed to give him six months' notice of termination had been overlooked. A re-calculation was necessary. This was done and the plaintiff was given a cheque for $851,955.00 dated 22 August 2000.

3. By this time, the defendant had calculated its claim in respect of overpaid bonuses. An attempt was made to have the plaintiff endorse the cheque back to the defendant, in purported settlement of its claim for repayment of the overpaid bonuses. This the plaintiff refused to do. He took the cheque and presented it. However, it was dishonoured, because it had been signed by signatories of the plaintiff who did not have the power to sign for such a high figure.

4. The plaintiff accordingly now claims against the defendant in Action No.378 of 2001, on the dishonoured cheque. In Action No.9271 of 2001 which was commenced in the Labour Tribunal and transferred to this court, he claims six months' salary in lieu of notice of termination of employment, plus other benefits, amounting in total (on final figures calculated by counsel) to $978,903.00.

5. The defendant's case is that the cheque was obtained by fraud, or that there was total failure of consideration for it. As to the fraud the defendant says that the plaintiff falsely overbooked sales revenue, or caused it to be overbooked, in respect of sales either not made at all or not paid for by the purchasers. Alternatively, if the plaintiff did not know that the sales were not made at all, he ought to have known it, and was habitually neglectful of his duties and misconducted himself in a manner inconsistent with the due and faithful discharge of them.

6. Therefore, either because the plaintiff obtained the cheque by fraudulent misrepresentation that the overpaid moneys were due and owing to him, or because he claimed bonuses which were not in fact due, the plaintiff committed gross misconduct and was liable to summary dismissal under section 9 of the Employment Ordinance, Cap.57. In making bonus payments to the plaintiff and subsequently agreeing to payment in lieu of notice, the defendant was acting under a mistake.

7. The defendant says that the overpayment of bonuses amounted to $901,815.00. On the basis that the plaintiff was liable to summary dismissal, it counterclaims for that amount plus an overpayment of termination benefit amounting to $268,899.00. If it be found that the plaintiff was not liable to summary dismissal but was entitled to termination benefits, the defendant says that its claim for overpayment of bonuses should be set off against those benefits, which results in a balance due by the plaintiff of $68,512.68, for which it counterclaims. The figures have been subject to some adjustment in the course of the trial. The defendant further says that the plaintiff's claim on the dishonoured cheque is precluded by section 24 of the Bills of Exchange Ordinance.

8. By way of reply and defence to the counterclaim the plaintiff denies that he knowingly overbooked sales revenue. He denies being aware of any overbooked sales revenue; and he denies misconduct. He says that if any revenue was overbooked, the defendant is estopped from denying his entitlement to it, because it had represented that he was entitled to it once it was paid out on the relevant revenue being booked. The plaintiff also says that if the defendant had the right to summarily dismiss him, it had in any event elected to terminate the contract in accordance with its terms and so is precluded from relying on its right to dismiss him.

9. It is not in dispute that the terms of the plaintiff's employment entitled him to six months' notice of termination or payment in lieu. There are however disputes over various other heads of claim such as housing allowance, car lease and other expenses. Nor is it in dispute that he, in common with other managers, received bonuses based on the achievement of sales figures. The bonuses were calculated on the sales figures put forward quarterly; but a credit period was commonly given to the buyers. The bonus plan effectively allowed the defendant to claw back bonuses which had been paid on the basis of sales figures achieved, if those sales were not concluded, i.e. if the money did not come in within the credit period.

10. The following facts are not in dispute or are incontrovertible on the documents. The parties entered into a contract of employment in May 1998. The terms appear in an offer letter dated 22 May 1998 and a further letter dated 28 May 1998 signed by both parties. The contract provided for termination on one month's notice. This period was subsequently amended by agreement to six months; the evidence for this appears in an e-mail dated 17 November 1999 from the plaintiff to the defendant's Vice President, Mr John Debrincat, a hard copy of which was signed by the latter. This same e-mail also recorded agreement on car acquisition, finance and running costs. The defendant had by an e-mail of 25 August 1999 also agreed to pay the school fees of the plaintiff's son.

11. At the end of 1998 the defendant decided to split its Asia region into three regions, namely Korea, North Asia and South Asia. North Asia consisted of Mainland China, Hong Kong, Taiwan and the Philippines. The bulk of the business in fact came from Mainland China. The defendant was made sales director of the North Asia region. He reported to Mr Debrincat. Under him were four sales managers who reported to him, and under them were about forty salespersons. Most of these were in Beijing where the plaintiff had a representative office. The plaintiff himself spent about half his time in Beijing.

12. The defendant on 9 July 1999 put forward to the plaintiff its Sales Compensation Plan for the fiscal year 2000, i.e. 1 April 1999 to 31 March 2000, and the defendant accepted this plan on 24 April 1999. The plan provided for the plaintiff to have various bonuses, to be calculated on the achievement by the company of quarterly sales quotas. The plan contained the following definition :

"Sales - By definition, a sale occurs at the time a signed contract is approved by Compuware management and an invoice is sent. A sale is considered final only if the signed contract and payment is received within 60 days of the date of the invoice. Until the sale is final no bonus payments shall be deemed as earned. Compuware reserves the right to reverse commission and bonuses associated with the sale until full payment is received by Compuware."

13. The management at Compuware Corporation became concerned, in the period from 1998 to 2000, with the shortage of revenue from the North Asia region. Although a lot of orders had apparently been received, by the end of June 2000, the accounts receivable for Mainland China had grown to about HK$59 million or about US$7.5 million. At the same time the Corporation had to send funds to the plaintiff to meet operating cash requirements which included the operation of the North Asia region and the Beijing office. Between October 1998 and December 2000, it sent a total of US$6,100,000.00.

14. Because of this, the Compuware Corporation sent in an auditor, Michael Chatz from the US headquarters. He carried out an audit and reported back in June 2000. He was particularly concerned that while sales totalling US$1,564,938.00 had been booked for a software distributor, China National Computer Software & Technology Service Corporation ("CS&S") only US$111,978.00 of that had been collected. There were various other companies with large outstanding debts and it was found that certain purchase orders that had been processed were not sufficient for revenue recognition purposes. In brief, for the revenue to be recognised the defendant required it to be shown that the purchasing distributor had committed end-users to whom the products would be sold on. Following on this report Mr Debrincat and Mr Scheidt, a Vice President of the US corporation went to Beijing to investigate; and on the basis of what they found it was decided to terminate the plaintiff's employment. According to an e-mail from Mr Scheidt to various senior managers, he believed that the plaintiff had "knowingly put fictitious revenue on the books in China". It was also said that a manager working under the plaintiff, one Dickson Chan, had taken expense money from a fraudulent expenses claim of another employee, had booked fictional revenue, and had taken the company's money and directed it elsewhere.

15. On 7 August 2000 the defendant wrote to the plaintiff a letter signed by Mr Debrincat giving notice of termination of employment on one month's salary in lieu of notice. The letter credited the plaintiff with one month's salary including housing allowance, but deducted advances made and arrived at a final figure of $70,867.00, for which a cheque was drawn. The letter also contained the following paragraph :

"Your pro rata annual leave entitlement as at 7 September 20000 will be HK$89,999. However we note that the Company has made payments of cash commissions and bonuses to you on sales you have previously made. These sales have subsequently been reversed and you are required to reimburse the Company for payments made on these reversed transactions. These amounts will be calculated and notified to you."

16. The defendant subsequently realised, after an exchange of messages with the plaintiff, that he was entitled to six months' payment in lieu of notice. It was calculated that the plaintiff was owed a further $841,955.00 and that he owed the defendant $801,575.00 for overpayment of bonus. He was asked to attend at the office of Messrs Minter Ellison, the defendant's solicitors. There he was given a letter setting out the figures and a cheque for $841,955.00. He was asked to endorse the cheque back to the defendant in settlement of the defendant's claim; but he refused to do so. He took the cheque and left the meeting.

17. Unfortunately the cheque had been signed by two signatories, Mr Wilkinson and Ms Queenie Wong, who only had authority to sign cheques up to $200,000.00. When the plaintiff tried to cash the cheque, it was dishonoured. Subsequently the plaintiff was asked to bring back the dishonoured cheque and exchange it for a fresh one signed by Mr Debrincat but this he declined to do.

18. The defendant, having carried out further investigations, then decided that the scale of the problem was greater than originally thought. By the time the plaintiff's contract was terminated, it had already been decided following the June audit to reverse sales of about US$3 million on the basis that they were fictitious. Ultimately it was decided to reverse a total of about US$8.8 million, or HK$59,145,580.00. The defendant decided that it would not issue a fresh cheque. So the plaintiff sued on the dishonoured cheque and also instituted proceedings in the Labour Tribunal.

19. The first issue to be decided is how much is due to the plaintiff on termination of the contract by payment in lieu of notice. The parties are not very far apart. Revised figures were made up in the course of the trial. The figures are :

	Plaintiff	Defendant
Salary	$450,000.00	$450,000.00
Leave Pay	$132,168.00	$113,789.28
Less credited	-$89,999.00	-$89,999.00
Housing allowance	$199,998.00	$199,998.00
Car Lease	$215,274.00	$215,274.00
Travel expenses	$70,474.00	$28,450.04
School fees	$59,500.00	$0.00
Club memberships	$19,200.00	$0.00
		$60,000.00
Car running costs	$60,000.00	(subject to proof)
Mobile phones	$6,500.00	$0.00
Less credited on 7 August	-$144,212.00	-$144,212.00
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Total	$978,903.00	$833,300.32

20. What is disputed is the leave pay, travel expenses, school fees, club membership fees and mobile phone charges. The plaintiff claims that the leave pay should be calculated, as should the payment in lieu of notice, by including the whole remuneration package. The defendant argues that school fees, club membership fees and mobile phone charges are expenses and not part of remuneration.

21. In fact the letter dated 28 May 1998 signed by the plaintiff and Mr Ross Wilkinson for the defendant show that the defendant agreed to pay costs associated with the running of a motor vehicle, mobile phone rental and call charges and membership fees for two clubs.

22. In an e-mail dated 25 August 1999 Mr Debrincat wrote to the plaintiff :

"I am in agreement that we will pay your son's school fee through expenses in replacement of the increase in base salary for FY 2000."

This was in answer to an e-mail from the plaintiff in which he said that he would like to submit the school fee as expenses so that he would save tax and the company would save on the provident fund contribution. In evidence the plaintiff said that he still paid tax on the school fees. However when shown a company payroll record he admitted that neither the school fees not the club membership fees had been put through as salary payments, because they had been paid as expenses.

23. The communication of 17 November 1999 provides that on involuntary separation "the company will pick up a further six months of related expenses". It is not clear that this relates only to motor vehicle expenses referred to earlier in the same message; this provision comes under the heading of "Termination" which, by this communication is extended to six months' notice. There is no clear explanation in Mr Debrincat's evidence.

24. The definition of "wages" contained in section 2 of the Employment Ordinance is :

"'wages' subject to subsections (2) and (3), means all remuneration, earnings, allowances including travelling allowances and attendance allowances, attendance bonus, commission, overtime pay, tips and service charges, however designated or calculated, capable of being expressed in terms of money, payable to an employee in respect of work done or to be done under his contract of employment, but does not include- [irrelevant]"

25. The definition is very wide. Special expenses incurred by the employee by the nature of his employment are specifically excluded. That is why the plaintiff cannot claim his travel expenses as part of remuneration for the purpose of payment in lieu. But recurrent expenses not incurred by the nature of the employment, but which the employer agrees to pay, must necessarily be part of remuneration. I do not see that it matters whether they are paid under the heading of "expenses" or of "salary"; that is a matter between the parties. But if they are paid periodically as a matter of course they must, I think, be part of remuneration.

26. It seems to me therefore that the plaintiff's figures for school fees and club membership subscriptions must be accepted. The defendant agreed to pay them. Further, they are part of ongoing remuneration and must be included in the calculation of wages in lieu of notice. This last also applies to the accommodation allowance. That is an allowance not specifically excluded by the statutory definition, which only excludes the value of accommodation provided by the employer.

27. The remaining matters are the car running expenses and travel allowances. The plaintiff says that insurance cost $50,000.00 or $55,000.00 per annum; the licence $13,000.00; and the petrol $8,000.00 per month. This seems excessive. Certainly the licence fee is exaggerated; the highest private car licence fee is $11,329.00 p.a. But apart from that there is nothing to contradict the plaintiff's figures and the defendant accepted them in its calculation of 22 August 2000. This also applies to the figure for travelling expenses. It is all very well to say now, as Mr Debrincat does, that that acceptance was a mistake. But in the absence of anything specific to contradict the plaintiff I think his figures must be accepted.

28. I therefore find that the plaintiff's entitlement on termination under the contract of employment was $978,903.00.

29. The next issue is whether the defendant knowingly and fraudulently put false sales figures forward, or in effect negligently and in breach of his duty as manager allowed them to go forward. Either way there would be grounds for summary dismissal. The defendant would have a complete defence to the plaintiff's claim unless it is found to be barred by reason of its election to terminate the plaintiff's employment rather than dismissing him summarily from going back on that election now.

30. The counterclaim then arises. Is the defendant entitled to the return of bonuses, or is it estopped from claiming them? If it is entitled, how much is it entitled to?

31. I do not think there is any dispute that some of the sales figures on which the plaintiff's received bonuses had been credited to him were fictitious though, as I understand it, the plaintiff's case is that a large proportion of them must have simply been bad debts. It must be accepted that one way or another, HK$59,145,580.00, i.e. the sum reversed, related to orders put through but never paid for; after the reversal the company's auditors passed the accounts for the financial year and the plaintiff agreed that he had no reason to think that the auditors were wrong. There is no dispute that there was a very considerable increase in the sales figures for China since the plaintiff was put in charge of the North Asia region.

32. Evidence on the issue of whether the plaintiff fraudulently or negligently put the figures forward came from Mr Debrincat and from the defendant himself. Ms Rauchholz, the international financial controller, came into the picture after that, and worked out the figures, arriving at a total figure for overpayment, for which the defendant counterclaims, of $901,815.00.

33. According to Mr Debrincat, sales in North Asia immediately improved after the plaintiff joined the defendant. The plaintiff generated a large amount of confidence in his abilities on the part of his seniors. However he tended to keep his sales team very close and isolate them from the rest of the organisation.

34. At about the end of 1998, it was decided to restructure the senior management of the defendant. At this time the plaintiff was promoted to be director of the North Asia region. He was responsible for all product lines sold in North Asia. He hired Dickson Chan as a sales manager, Ken Kwok as a channel manager and Thomas Leung as a sales manager. These people started to build up their business in China, but it grew out of control. China appeared to become the greatest producer of distributed revenue in the defendant's international organisation. However cash flow in the North Asia region was a problem and it was necessary for cash to be provided from the American Corporation in order to fund the operations in North Asia.

35. Mr Debrincat became very concerned about the growing figures for accounts receivable in China. He asked the plaintiff for an explanation which was that late payment was a common feature of doing business in China.

36. By the beginning of 2000, the outstanding accounts receivable figures had become completely unacceptable to the management of the defendant. A number of companies owed large amounts of money to the defendant and this was queried. The plaintiff's explanation was that in China, payment was always late and it was necessary to be patient. Of particular concern was the case of CS&S which, as at 31 May 2000 owed US$1,564,938.00 in terms of book sales but had only paid US$111,978.00.

37. By 30 June, the accounts receivable for China had grown to HK$59,004,560.00. By this time, the plaintiff had been paid bonuses for the period April 1999 to June 2000 amounting to HK$940,565.00. At this point, Mr Debrincat began to have doubts about the plaintiff's performance.

38. In the meantime the Compuware audit department did an internal audit of the China business from the United States. This was done by a team under a Mr Michael Chatz. He found an inability to match the Compuware sales documentation with the customers' own documentation showing that they had authorised the purchase. It was found that some of the purported sales were only stocking arrangements which should not have been relied on for revenue recognition purposes. There were also ongoing problems with the accounts receivable. Various figures were given in Mr Debrincat's statement, but I do not need to reproduce them here.

39. In any event in August 2000, Mr Debrincat, along with Mr Steven Scheidt visited Beijing to investigate the position. According to him it became apparent that the plaintiff had made a shambles of the defendant's revenue recognition policies. The plaintiff had exaggerated licence revenue on the books for his own personal gain. In particular Mr Debrincat referred to sales made through the distributor, CS&S. He says that he met with representatives of CS&S, who informed him that of the sales booked totalling US$1,726,942.00, CS&S were only committed to US$231,753.00.

40. It was then decided to terminate the plaintiff's employment. Mr Debrincat says at this stage the defendant had not yet completely discovered the full extent of the fictitious sales and over-booking of sales but had resulted in overpayment of bonus. That was why it was initially proposed that the plaintiff should be paid a substantial sum in lieu of notice. However when it became apparent that the overpayment exceeded any possible termination benefit the defendant could not justify making any further payments. If the defendant had understood the full extent of the fictitious sales it would have refused to pay the amount which it now says was overbooked.

41. Mr Debrincat denies that there was ever any agreement to vary the terms of the bonus plan. He says that it would have been nonsensical for the defendant to allow a bonus entitlement based only on book sales rather than actual sales.

42. Mr Debrincat says that by 7 August 2000 it had become obvious that the defendant had mismanaged the North Asia region and that sales in China had been grossly overstated. He told the defendant of all this and said that there would be ongoing investigation. He refers to various e-mail communications around the latter part of August 2000.

43. In oral evidence Mr Debrincat expanded on his trip to Beijing in August 2000. He said that he and Mr Scheidt had meetings with the main debtors, and asked in each case if they would pay the money. In general their responses were negative. That was some confusion as to why the defendant's representatives were there and asking the questions.

44. In particular, there was a meeting with CS&S. Each representative was surprised that the defendant should be asking for the amount of money which it sought. There were some difficulties with translation, although the defendant's team had an independent interpreter, and the meeting became quite aggressive. There followed another, later meeting between Mr Debrincat, Mr Scheidt and the representatives of CS&S at which those representatives, according to Mr Debrincat, simply did not believe the defendant's figures. They said that the accounts receivable were exaggerated and they believed that many of the transactions were not sales of the defendant's products. They indicated three or four accounts, which were worth about $230,000.00 and said that there were technical issues over them, but they were genuine. They also said that they had paid money, which the defendant had never seen. They said that the other US$2.7 million which according to the defendant's figures were owed, did not relate to orders made by their company. They said that they did not have users who had made commitments to buy the defendant's products. In oral evidence, Mr Debrincat also referred to a trip he had made to Beijing at the end of August 2000. It appears that at that stage he found, in desk drawers within the defendant's office in Beijing, documents from the defendant's sales people on letterhead paper belonging to another company, Global Data. He also found letterhead paper and chops for different companies in desk drawers.

45. Mr Debrincat says that after a couple of days of investigation during the first trip, and after the plaintiff had left Beijing for his own purposes, it became more and more apparent that there was some really major problem in the China business. The initial reaction of Mr Scheidt and himself was to continue to support the plaintiff but this became increasingly difficult over the next couple of days. They decided that they have to change the business structure and that involved terminating the contract of the plaintiff.

46. By this time it had become apparent that the manager, Dickson Chan, had been embezzling, and putting false figures to the books. Mr Debrincat and Mr Scheidt decided that the defendant must have known about all these faults. He had an apartment in Beijing and spent about 50% of his time in the Beijing office. So the decision was made that the plaintiff had to go. In the words of Mr Debrincat, "He had to go either because he had done his job so badly or else he must have known about what was happening."

47. When Mr Debrincat and Mr Scheidt returned to Hong Kong they chose not to accuse the plaintiff of conduct which would entitle them to dismiss him. Their impression was that he needed one month's pay in lieu of notice. They had the advice of lawyers, when they came to this decision. There was an oversight as to the period of notice which was owed to the plaintiff. On 7 August 2000 Mr Debrincat handed the plaintiff the dismissal letter and the cheque for the figure that had then been worked out. Following that, the defendant claimed that he was owed six months' paid in lieu of notice. Further legal advice was taken and the defendant was advised that the plaintiff was owed six months and that payment should be amended to reflect that. There was discussion then about bonuses paid in respect of figures which had been reversed. At that stage there were reversed figures of about $3 million. The defendant received legal advice that it should try to find a settlement position whereby the plaintiff would repay the money which he owed, in terms of overpayment of bonus and it was recommended that he be offered the chance to endorse the cheque back to the defendant in settlement of what was owing to the defendant. The defendant was advised that if the plaintiff did not do that, it could take legal action against him later.

48. Following this, it became apparent that the defendant would have to reverse significantly more of the figures that had been booked. By this time, Ms Raucholz had been to Hong Kong and had carried out more investigations. At that stage it was suggested to the plaintiff that he simply accepted the situation whereby he would repay or endorse the cheque for his terminal benefits to the defendant and settlement of their claim, and "walk away". But he would not do that.

49. Then, according to Mr Debrincat, he went to Beijing at the end of August 2000 in order to carry out further investigations. On this occasion, the various salespersons gave him much information to the effect that many of the orders were not real and the window to true business. In addition, one Paul Xu had had a couple of transactions where cash had been collected and diverted to third parties, at the instance of Dickson Chan.

50. On this trip, Mr Debrincat found product packages in an office within the defendant's premises. They had, apparently, been shipped from America but not delivered to the end-users.

51. Things were so bad in Beijing that the defendant closed its office there, and terminated the employment of some 40 salespersons. Arrangements were made to set up another company, with a Hong Kong businessman, to act as master distributor for the defendant in China.

52. With regard to the sales compensation plan Mr Debrincat said that although this provided for the reversal of sales if payment was not made within 60 days, in fact in most cases 90 or 120 days was allowed. He said the company was generally lenient and did not reverse many sales and did not often take back commission. However the right to reverse bonuses was always available to the company unless the sale was paid.

53. He said that the company did not treat the defendant in any way so as to give him the impression that the company's right under this clause could not be relied on.

54. For the cheque that was returned, the defendant pressed him to issue a fresh cheque. However because of discussions between senior management and the lawyers, it was decided that no further cheque could be issued. Mr Debrincat tried to suggest to the plaintiff on a number of occasions that he just walk away. The overpaid bonus was more or less equivalent to what the company owed the plaintiff.

55. Mr Debrincat said that with the knowledge he had after the second reversal of sales, he would have dealt with the plaintiff's termination differently. However he was hoping that the plaintiff would see that his best course was just to walk away. In fact that was discussed on 7 August at the time of termination. But the plaintiff refused to accept this proposition and hence this litigation came into being. Mr Debrincat believed that the plaintiff was responsible for serious misconduct though he thought that the inference that the defendant had actual knowledge of false sales being booked was speculative. The plaintiff never actually admitted knowing that the sales were false, except that in June 2000 he had told Mr Debrincat that Dickson Chan had put through the books transactions which were not real. He had no direct knowledge to confirm the belief of Mr Scheidt that the plaintiff had knowingly put false sales figures through the books.

56. From cross-examination it appears that Mr Debrincat could not remember which transactions CS&S specifically denied. It appears that the information on the basis of which sales were reversed was gleaned by various people from various customers, agents and end-users, over a period of some months. Mr Debrincat however said that he was clear that none of the transactions which had been reversed (according to a spreadsheet produced by him) had ever been paid. He did not agree with counsel's suggestion that the transactions specifically denied by the customers were only worth about HK$20 million. Nor did he admit that the other items which were reversed were only reversed because of simple non-receipt of the price.

57. With regard to the information which he had obtained from the various salesmen and managers in Beijing, Mr Debrincat said that he had asked them whether they had falsified the figures and secondly whether they believed that their management knew. Some of them would not answer. Some admitted that they had falsified figures and that their managers knew. However no one specifically told him that the plaintiff knew of such falsification. At most there was an admission that the "manager or managers" (for there is no plural in Chinese) knew about the falsification. He did not have any absolute proof of the knowledge on the part of the plaintiff. However he did have statements of people who had worked under Dickson Chan that their "managers" knew of the falsifications.

58. Mr Debrincat was asked why the company had decided to terminate the plaintiff's employment rather than dismiss him. He said that this was a matter of legal advice. There had been discussions at this stage with his colleagues as to whether the plaintiff should have his contract terminated or be dismissed. It was following on these discussions that the solicitor was consulted and advice was obtained. On the basis of such advice it was eventually determined that the plaintiff should have his contract terminated on payment in lieu of notice. He admitted that in the first instance the only mistake made was that the defendant had to pay six months in lieu of notice and not one month. But then, on 22 August, after knowing of this mistake the defendant still wanted to dismiss the plaintiff by terminating his contract. He did not know if the cheque had been presented to the plaintiff on the basis of it being a condition precedent that the plaintiff endorse the cheque back or he would not receive it.

59. It also appeared from cross-examination that the evidence of the finding of the company chops in the office and also of the finding of undelivered software packages could not be specifically laid at anyone's door. The plaintiff, it appeared, worked in the conference room when he was in the Beijing office. The undelivered packages were found in some other office. The chops were found in the desk of some salesmen but it was not clear which ones.

60. There was a good deal more cross-examination on the rather technical aspects of revenue collection and how the business operated in Beijing. I need not reproduce this here. However, it is, I think, clear that Mr Debrincat had no reliable evidence, even hearsay evidence from other salesmen, that the plaintiff had direct, first-hand knowledge that fictitious transactions were being recorded. Insofar as he did know that Dickson Chan was recording fictitious transactions, it is not clear that he knew and allowed this to go on, rather than that he had found out about it and was reporting the fact to his senior officers.

61. The defendant's evidence about the booking procedures, and the state of his own knowledge, is as follows. A manager below him such as Dickson Chan would sign the booking forms. A booking administrator would check if there were any missing papers or exceptions required, which were beyond the defendant's approval, which was to give a discount of up to 25%; any more would have to be referred to Mr Debrincat. If all was in order the plaintiff would sign the booking forms and the whole set would be sent on to the accounts department for them to sign the booking forms. The papers would be passed on to one Jenny Cheung in the accounts section. She controlled what to book and when to book and checked and balanced on the paperwork; and she had any doubts in her mind she would seek the approval from her superiors in the accounting department or the approval of Mr Debrincat to confirm the bookings.

62. The plaintiff denied that he knew about fictitious sales. He knew that Dickson Chan had been dismissed; and he believed that Chan had embezzled. He had discovered the wrongs that Dickson Chan did, and had reported to Mr Debrincat who told him to report to lawyers in Beijing, take statements from the defendant's staff and customers, and this he did. But before Dickson was sacked, he did not have any query or suspicion that the booking forms he put forward were suspicious. He would not have had such suspicions because the Dickson was following the defendant's published policies and guidelines.

63. Under cross-examination the plaintiff maintained that he had not known of any fictitious sales. Indeed it seems that as far as he was concerned the sales, or many of them, were genuine. He had no reason to doubt the auditors, but as far as he was concerned the decision to reverse sales had been unilateral on the part of the plaintiff and it did not necessarily mean that the sales were fictitious.

64. The plaintiff said that he thought the sales were genuine because they went through all proper channels. He was just the middle person who had to check; he thought they genuine and therefore submitted them for booking. I asked him if his position was basically that the paperwork looked all right, so he thought the sales were genuine; but he did not make any other checks than on the paperwork; and he said that that was correct. Later he said that he had no reason to doubt his staff; they were following company guidelines. Further the documents had been checked, after they left him by responsible people in the finance department. Further he had visited large customers, such as the Customs Department, the CAAC, banks and the company CS&S, which was the customer which later denied having placed many of the orders that had gone through the books. Because he closely monitored his staff and he visited the customers and because of the checks and balances plus the company guidelines and procedures, he had been satisfied.

65. So far as product packages were concerned he denied that any of them would have been found in the office; they would have been shipped out to the customers; but he admitted that he had never checked to verify if that happened.

66. With regard to an incident in late 1999 when the head office had asked for a list of end-users in respect of some orders, he said that if he had seen the list he would not have verified it by contacting end-users but rather would have relied on what he heard the pre-sales and sales staff say.

67. The plaintiff called as a witness Mr Alvin Wu, a salesman working under him at the relevant time. His evidence was mainly concerned with the procedures relating to the booking of sales. He confirmed that Jenny Cheung decided what should be booked. As to what the plaintiff did or knew, he could not assist. The plaintiff also produced an e-mail from a salesperson, Tammy Tan, who said that all her orders had been genuine and that she had never told anyone that Dickson Chan or the plaintiff had told her to falsify orders. This was, it appears, produced in order to attempt to gainsay some of Mr Debrincat's evidence of what he had been told in Beijing. There was also an e-mail from a manager, Hana He, who was in charge of the office in Beijing after 7 August 2002. She said that she did not remember if chops of other companies or undelivered software packages had been found in the office.

68. It is argued for the plaintiff that not all the reversed sales were fictitious. The rest were simple non-payment of genuine sales. The problem of late payment was common in China and indeed it is common cause that most customers were given credit of 90 or 120 days. The plaintiff could not be held personally responsible just because customers did not pay. So there is a motive on the part of the defendant to exaggerate further and say that all reversed sales are fictitious.

69. It is also argued that nothing which was turned up by the investigations carried out by Mr Debrincat at the end of August 2000 could implicate the plaintiff.

70. Much of Mr Debrincat's evidence of those investigations is hearsay, and rather vague hearsay at that. It is based on what he was told by salespersons and in some cases customers. Insofar as the salespersons purported to tell him that "management" which could have been Dickson Chan or the defendant or both knew that false figures were being put through the books, this cannot be relied on. Such persons who were themselves guilty of dishonest behaviour might have a motive to implicate those above them and even if they gave live evidence it would have to be treated with caution. So there is no direct evidence that the plaintiff knowingly put forward fictitious sales figures. Nor is there any admission from him that he did so.

71. I can however rely on Mr Debrincat's evidence of his meetings with customers and their reaction to the defendant's claims. It is clear from that evidence that in many cases and particularly in the case of CS&S, the customer was not simply refusing to pay for what it had ordered but denying having placed the orders. I do not think there can be any doubt that a large number of the orders which went through were fictitious.

72. It is also not in dispute that Dickson Chan was putting forward fictitious figures. There can be no doubt that fictitious figures were put forward. The defendant authorised them. He, being the manager, would be in a position to know that the figures being put through had increased; in fact most of the increase came from sales of Uniface, under Dickson Chan, and the plaintiff had previously himself been in charge of selling Uniface. Yet on his own admission, he simply checked the paperwork, and if it appeared to be in order, he put it forward. Although he said in cross-examination that he had made inquiries of large customers like CS&S I do not believe that this can be right, because if he had done so he would have found what Messrs Scheidt and Debrincat found, that CS&S would deny having placed most of the orders ascribed to it. He says that he made inquiries of salespersons, but that would hardly be enough to find out if their orders were genuine.

73. It appears from the plaintiff's own evidence that he simply checked the paperwork, signed it and passed it on. He was a senior manager but in effect he only did a clerk's work.

74. Section 9 of the Employment Ordinance provides :

"An employer may terminate a contract of employment with notice or payment in lieu

(a) if an employee, in relation to his employment

(i) wilfully disobeys a lawful and reasonable order;

(ii) misconducts himself, such conduct being inconsistent with the due and faithful discharge of his duties;

(iii) is guilty of fraud or dishonesty; or

(iv) is habitually neglectful in his duties; or

(b) on any other ground on which he would be entitled to terminate the contract without notice at common law."

75. I have no doubt that the plaintiff misconducted himself by omission to take proper care as manager and that his conduct was inconsistent with the due and faithful discharge of his duties. The defendant therefore had the right to dismiss him summarily.

76. Unfortunately for the defendant, however, it did not dismiss the plaintiff. It terminated his contract on payment in lieu of notice. These are, as Mr Hung for the plaintiff points out, two inconsistent remedies. He says that the defendant must take one or the other; if it takes one, it cannot then change its mind. The defendant's case is of course that it was acting under a mistake but as Mr Hung says, by the time it was decided to get rid of the plaintiff, it had legal advice and had already worked out that a large amount of sales had to be reversed.

77. It is also, I think, quite clear from Mr Scheidt's e-mail, following his Beijing visit, that the defendant was taking the view that the plaintiff had conspired to put forward fictitious sales or at least knew that they were being put forward. So the defendant must have known that it had the choice to "fire" the plaintiff out of hand.

78. The plaintiff relies on the principles of waiver by election set out by Yuen JA in Large Land Investments v. Cheung Siu Kwai [2003] 1 HKLRD 313 at paragraph 15 :

"The principles to be applied in this area of law are as follows:

(1) A waiver by election occurs:

... in the context of a binding contract, when a state of affairs comes into existence in which one party becomes entitled, either under the terms of the contract or by the general law, to exercise a right, and he has to decide whether or not to do so. His decision, being a matter of choice for him, is called in law an election (Motor Oil Hellas (Corinth) Refineries SA v Shipping Corp of India (The Kanchenjunga) [1990] 1 Lloyd's Rep 391 at p.398).

(2) It is a prerequisite of election that the party making the election must first be aware of the facts which have given rise to the existence of his right (Motor Oil Hellas (Corinth) Refineries SA v Shipping Corp of India (The Kanchenjunga) at p.398).

(3) It may be that the party must also be aware of his legal right of affirming or rescinding the contract when there has been a repudiation by the other party (Peyman v Lanjani [1985] Ch 457 - although this aspect was not disputed and therefore not considered by the House of Lords in Motor Oil Hellas (Corinth) Refineries SA v Shipping Corp of India (The Kanchenjunga).

(4) Further, since a party who elects not to exercise a right which has become available to him is abandoning that right, he will only be held to have done so if he has so communicated his election to the other party in clear and unequivocal terms (Motor Oil Hellas (Corinth) Refineries SA v Shipping Corp of India (The Kanchenjunga) at p.398)."

79. The defendant elected to terminate the plaintiff's contract rather than to dismiss him summarily. It did this at the stage when it knew of facts which would have entitled it to dismiss the plaintiff summarily, and when it had taken legal advice. As Mr Debrincat put it,

"But everything pointed to the fact that either David knew what Dickson was doing, or else he had been doing something entirely other than managing, because you can't properly manage business without knowing what those directly reporting to you are doing; so either way, we thought David should go. He had to go either because he had done job so badly or else he must have known about what was happening. When we came back we chose not to accuse him of conduct which would entitle us to dismiss him. Our impression was he needed 1 month in lieu. We got Minter Ellison's advice, and had our Human Resources people provide them with information; but we gave them the wrong information because though his contract said 1 month I had agreed to 6 months." (my note).

80. The defendant communicated its decision to the plaintiff in clear and unequivocal terms by actually purporting to terminate the plaintiff's contract on one month's notice. It maintained that stance when it found that six months' notice was provided for. While it is not clear that the defendant ever communicated in terms "We know we can dismiss you, but we choose instead to pay you off" I do not think such a communication would be necessary for the doctrine of waiver to operate. In any event the plaintiff on his own evidence knew, even if he was not being accused of complicity in putting forward false sales, that he was being accused of mismanagement and his services were no longer needed.

81. It seems to me that the defendant having elected to proceed to terminate the contract on payment in lieu of notice has waived its right to dismiss. I have considered the cases advanced by Mr Carolan for the defendant but they do not seem to be of any real assistance in this case.

82. It follows that the defendant cannot now purport to dismiss the plaintiff summarily. It cannot avoid liability for the figure which I have found to be the plaintiff's entitlement on termination under the contract of employment, i.e. $978,903.00. I turn to the counterclaim.

83. I have noted the argument above that not all the reversed sales were necessarily fictitious. It is also argued that some reversals may have been done ahead of time, that is, ahead of the 120 days credit period actually allowed in place of the 60 days referred to in the definition quoted above. That may be so, but I have not gone into it in any detail, because I do not think it makes any difference. Whether the customers did not pay because the sales were fictitious or because they simply could not pay, the defendant was not paid for what the Beijing office under the plaintiff said it had sold. The terms of the plan allow the defendant to reverse bonuses until full payment is received. The fact that it informally allowed credit of 120 days rather than the 60 days provided for in the definition in the bonus plan would not preclude it from making any reversals. There can be no real dispute as to the figures put forward by Ms Rauchholz.

84. I turn to the question of estoppel. There is no dispute that if there was any reversal of sales after bonus for the quarter had been paid, the defendant would adjust the figures in the quarter in which the reversal was made. Both Mr Debrincat and Mr Wilkinson agreed to that. Mr Debrincat said that he did not take any bonus in the following year because of the reversals applied here. Ms Rauchholz said that his bonus was reversed. The effect of reversal was that there would be a debit entry against the manager's bonus for the quarter in which the reversal was made; it would come off his bonus for that quarter. But, says the plaintiff, the managers kept the bonus as if it were final, in the quarters in which they were paid. There was no practice of clawing back the bonus booked and paid.

85. I do not see that there is anything in this. There might have been no actual repayment, but there was a debit entry against future bonus if a sale was reversed. The manager owed the company in respect of reversed bonus and it was set off against future bonuses in later quarters. The plaintiff was not there, in later quarters, to have the debit entry set off against bonus earned. But he still owed the company for the bonus reversed. It should also be noted that he agreed in cross-examination that no one had ever specifically told him that bonus overpaid would never be reclaimed. I do not see how the fact that for commercial reasons no reversed bonus had been debited against him previously could amount to a convention that no reversed bonus would be debited in future. That would effectively mean that the company had agreed to pay bonus, not on sales achieved, i.e. the money it received, but on sales booked whether paid for or not, and that sounds like pretty much of a pipe-dream to me.

86. I do not see, therefore, that the plaintiff can avoid liability to repay the bonus overpaid. I accept Ms Rauchholz's figures that this amounted to $901,815.00.

87. I turn to the question of the dishonoured cheque. Section 24 of the Bills of Exchange Ordinance provides :

"Subject to the provisions of this Ordinance, where a signature on a bill is forged or placed thereon without the authority of the person whose signature it purports to be, the forged or unauthorized signature is wholly inoperative, and no right to retain the bill, or to give a discharge therefor, or to enforce payment thereof against any party thereto can be acquired through or under that signature, unless the party against whom it is sought to retain or enforce payment of the bill is precluded from setting up the forgery or want of authority:

Provided that nothing in this section shall affect the ratification of an unauthorized signature not amounting to a forgery."

88. The signatories did not have authority to sign the cheque. Their signatures were inoperative. There was no ratification. Asking the plaintiff to come in and get another cheque might have been admission of a debt but was not ratification. There is therefore no separate claim on the cheque.

89. It follows that the plaintiff succeeds on his claim and the defendant on its counterclaim.

90. There will be judgment for the plaintiff in Action No.378 of 2001 in the sum of $978,903.00. The plaintiff is awarded interest thereon, under section 25 of the Employment Ordinance, at the District Court judgment rate from seven days from the date on which it should have been paid, which I will take as 7 August 2000 until payment.

91. The plaintiff's claim in Action No.9271 of 2000 is dismissed.

92. The defendant's counterclaim was originally made in Action No.9271 of 2000 and was the same in Action No.378 of 2001. The defendant has succeeded on its counterclaim and there will be judgment for the defendant on the counterclaim for $901,815.00 with interest thereon at prime rate plus 1% from the date of filing the counterclaim in Action No.9271 of 2000 until the date of judgment and thereafter at the judgment rate.

Costs

93. If the awards are set off the net result is a balance in favour of the plaintiff of only $70,088.00. He might have been better to "walk away". The simplest course would be to regard the plaintiff as having succeeded in recovering the balance and awarding him costs on the District Court scale. However large costs have been incurred on both sides. Further I believe the plaintiff has legal aid.

94. In Action No.378 of 2001, i.e. the employment action the plaintiff has succeeded and so should have the costs of his claim against the defendant. In Action No.9271 of 2000 i.e. the cheque action he has failed and so should pay the defendant's costs. At the same time the defendant should have the costs of its counterclaim in both actions.

95. Once the two cases were consolidated on 7 March 2001, it seems to me that the employment action effectively took precedence. The cheque was a secondary issue. Certainly not much time was spent on the cheque issue at trial. I did not record the amount of time spent but it was a small proportion of the whole.

96. In the hope of achieving a just and sensible result on costs and avoiding duplication I order as follows :

(1) The plaintiff will have the costs of his claim in the employment action, No.378 of 2001, up to the date of consolidation.

(2) The defendant will have the costs of the defence and counterclaim in the cheque action, No.9271 of 2000, up to the date of consolidation.

(3) From the date of consolidation, the plaintiff will have the costs of its claims in the consolidated action and the defendant will have its costs of its counterclaim in the consolidated action, except as provided below.

(4) In respect of the trial, of the total time taken half a day will be regarded as spent on the cheque issue. Since the defendant succeeded on that, the plaintiff will pay the defendant's costs in respect of that half day.

(5) Since the judgment is to be handed down the above orders are nisi.

(6) The plaintiff's own costs are to be taxed in accordance with the Legal Aid Regulations.